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Wednesday May 10, 2006 - 13:27:23 GMT
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Forex and Commodity Market Commentary and Analysis (10 May 2006)

The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2805 level and was supported around the $1.2750 level. Technically, the pair continues to orbit the $1.2775 level, representing the 61.8% retracement of the move from $1.3480 to $1.1640. All eyes are on the Federal Open Market Committee’s interest rate decision today. Most Fed-watchers believe policymakers will lift the federal funds target rate by +25bps to 5.00% but what the Fed indicates in its policy statement is more important than its action. Fed Chairman Bernanke recently testified the Fed may decide to end or pause its long-time tightening cycle at some point in the future and it’s clear from other Fedspeak that the Fed is nearing or is at the end of its tightening phase. Monetary policy usually works with a lag time of at least twelve months thus policymakers are probably beginning to assess the impact that their initial rate hikes have had on the market. Some Fed-watchers believe the Fed will move again at the end of June while others see today’s move as the final move for some time. Others, however, believe the Fed could go again on 8 August. The Fed is likely to signal tightening is that much closer to being completed in its statement today and could highlight the importance of upcoming economic data – as it has been – on possible future rate hikes. Fed officials Kohn and Moskow will speak tomorrow and April retail sales will be released then also. In eurozone news, Germany’s March trade surplus rose to €14.3 billion, exceeding expectations, while German April wholesale prices were up 1.0% m/m and 3.2% y/y. Additionally, Germany’s DIW institute reported it sees Q1 German GDP up 0.5% q/q and Q2 GDP up 0.6% q/q. Euro offers are cited around the US$ 1.2890 level.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥110.30 level and was capped around the ¥111.25 level. Chartists continue to point to the ¥109.60/55 level as the pair’s next major downside target. The yen moved higher after a Nikkei Financial Daily article speculated Bank of Japan will lift interest rates from near zero per cent next month. Japanese yields moved sharply higher and so did the yen, reflecting the possibility of a narrowing in the interest rate differentials between the U.S. and Japan. Data released in Japan today saw the March leading index decline to 60.0 from 90.9 in February, consistent with forecasts. Also, April foreign exchange reserves increased to US$ 860.24 billion from US$ 852.03 billion. April bank lending and money supply data will be released overnight. The Nikkei 225 stock index lost 1.39% to close at ¥16,951.93. Dollar bids are cited around the ¥109.60 level. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥141.10 level and was capped around the ¥141.90 level. The British pound and Swiss franc moved lower vis-à-vis the yen as the crosses tested bids around the ¥205.40 and ¥90.50 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0037 in the over-the-counter market, down from CNY 8.0044, and at CNY 8.0033 in the exchange-traded market. These closing prices represent post-revaluation highs for the yuan. The World Bank upped its 2006 GDP forecast for China to 9.5% from 9.2%. The Chinese government released a forecast that predicts Q2 CPI will be up less than 1% y/y. Traders await the release of the U.S. Treasury’s foreign exchange report today.


The British pound came off significantly vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8605 level after testing offers around the $1.8730 level. Sterling was volatile today as traders pushed the pair to intraday highs ahead of the release of Bank of England’s quarterly inflation report and then took the pair to session lows after its release. In recent weeks, traders have been buying pounds in speculation that the BoE’s next rate move would be a hike higher. The inflation report was less hawkish that some market participants expected. BoE Governor King highlighted the upside risks to inflation that dearer energy and commodity prices pose and said the Monetary Policy Committee is poised to do “whatever action is necessary” to keep inflation at its 2% target mandate. King said the MPC would be concerned in inflation expectations rise further and noted input prices are starting to add to inflation rather than lessen it. Short sterling futures anticipate official interest rates to be about 4.9% in Q2 2008. King was basically non-committal about the future course of interest rates but noted the pound’s recent gains have had a deflationary effect and said house prices have increased “more” than the MPC expected. Data released in the U.K. today saw a surprising decrease in the U.K.’s global trade deficit to ₤5.46 billion and REC/ KPMG noted U.K. firms increased demand for workers last month. The trade deficit data are important and suggest net trade could have a positive impact on U.K. GDP this year for the first time since 1995. Cable offers are cited around the US$ 1.8960 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.6875 level and was supported around the ₤0.6830 level.


The Swiss franc gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2155 level and was capped around the CHF 1.2210 level. Chartists are eyeing the CHF 1.2050 level as the pair’s next downside target. The April SECO consumer climate index will be released tomorrow. Dollar bids are seen around the CHF 1.2060/ 1.1990 levels. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5595 level while the British pound moved lower vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.2675 level.


The Australian dollar moved higher vis-à-vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7765 level and was supported around the $0.7710 level. Technically, today’s intraday high was right around the 76.4% retracement of the move from $0.7985 to $0.7015. The Australian government released a report today that claims its economy is facing structural changes on account of China’s and India’s growth and their impact on commodity prices. Australian dollar offers are cited around the US$ 0.7830 level.


The Canadian dollar lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1015 level and was supported around the C$ 1.0980 level. March new house prices will be released today followed by international trade data on Friday. U.S. dollar offers are cited around the C$ 1.1105/ 85 levels.


The New Zealand dollar extended recent losses vis-à-vis the U.S. dollar today as kiwi tested bids around the US$ 0.6235 level and was capped around the $0.6320 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from $0.7000 to $0.5990. New Zealand dollar offers are cited around the US$ 0.6375 level.

Gold/ Silver

Gold came off vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 696.65 level and was capped around the US$ 704.35 level, a fresh multi-decade high. Gold is up more than 35% this year and the weaker dollar helped the pair eclipse the psychologically-important US$ 700.00 figure. China Gold News reported China should up its gold holdings to 5% of its foreign exchange reserves to protect against FX volatility. Gold reserves currently account for some 1.3% of China’s FX reserves. China officially holds about 600 tons of gold though many insiders suspect holdings are significantly higher. Silver came off vis-à-vis the U.S. dollar as the pair tested bids around the US$ 14.10 level and was capped around the $14.61 level.

Crude oil

Crude oil slumped vis-à-vis the U.S. dollar today as light, sweet NYMEX crude futures for June delivery tested bids around the US$ 70.44 level and was capped around the $70.88 level. Traders await the release of the U.S.’s weekly inventories data today and expect it to evidence a further rise in gasoline stocks. Iranian President Ahmadinejad is visiting Indonesia and pledged to continue to pursue nuclear energy for non-military purposes. European Union officials are said to be drafting a proposed set of options to Iran that include ending its nuclear ambitions or stiff sanctions.


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